Self-employed individuals usually find it difficult to qualify for a conventional loan because they lack the documentation necessary to jumpstart this particular process. Fortunately, many financial institutions are now offering alternative loan products that cater to this specific market.
The focus of this article’s discussion will be on stated income loans. As the name implies, they allow borrowers to simply state their monthly income on the loan application. Let’s take a closer look at what this actually entails.
Documentation Types
- Stated income/verified asset loan (SIVA)
This allows a borrower to state his monthly gross income on the application form. Income verification is done by furnishing pertinent asset documents like bank statements.
- Stated income/stated asset loan (SISA)
Allows the borrower to state both the monthly gross income as well as personal assets. In this case, providing supporting asset documentation will no longer be necessary.
With the loans above, the debt-to-income ratio will still be computed since income sources have been provided.
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Employment Verification
While furnishing paystubs and/or tax returns are not required, the lender will still subject the borrower’s application to an income verification process. His employer will be contacted to confirm that the applicant in question is indeed connected with the listed firm.
Meanwhile, self-employed borrowers will be asked to submit a CPA letter verifying the income of a self-employed client
Higher Interest Rates
If you’re approved for a stated income loan, you can expect to pay a much higher premium than you would for other loan types. This is because you’re putting more risk in the hands of the lender. The same goes for the subsequent buyer, should the loan be sold on the secondary market.
Interest rates for a stated income loan are also about 0.25 to 0.50 percent higher than conventional loans.
Eligibility
You are required to have excellent credit scores and plenty of cash reserves. Putting down a higher down payment is also expected.
“With us, a buyer has to put down at least 30 percent down instead of the regular 20 percent on a conventional loan. Many of our clients end up putting down 35-50 percent,” says Brian O’Shaughnessy, CEO of Athas Capital Group, based in Calabasas, California. “The loan also has maximum 70 loan-to-value ratio,” he adds.
The right lender can educate you further about the specifics of stated income loans.
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The housing crisis of 2007 made stated income loans a thing of the past. They were single handedly accused of being the reason for the crisis and were therefore removed from the market. Since then, however, these loans have made a slow comeback for a small portion of the community. Not everyone will qualify for this niche home loan product because of its strict requirements thanks to the new Dodd Frank regulations that all banks must ensure that a borrower can effectively afford a mortgage, but many people still qualify. One of the most important aspects of a borrower for this type of loan is the credit score. Plain and simple – bad credit will get you nowhere.